BY Prithvish Uppal CFA, Prakhar Agarwal, Bhargav Sangi of Elara Global Research
NEW DELHI: ICICI Lombard’s Q2FY25 results paint a picture of a company continuing to grow steadily in a competitive general insurance market but with challenges emerging in key segments.
A 20% year-on-year growth in net profit reflects strong performance, yet the current valuation suggests that much of the good news is already priced in, making significant upside from here harder to justify.
While the company’s investments in retail health have paid off, and underwriting remains a key strength, other areas—particularly motor, property and casualty (P&C), and group health—are facing headwinds that could dampen future growth prospects.
Retail Health Shines Amid Mixed Segmental Performance
ICICI Lombard’s strong performance in the retail health segment is a highlight. The company posted an impressive 38% year-on-year growth in this area, underscoring the success of its investments in distribution, especially on the agency side.
Health insurance, a growing focus area, is benefiting from rising consumer awareness and demand for comprehensive health coverage. This bodes well for future growth, as the health insurance segment is expected to be a key driver for the company moving forward.
However, the rest of the portfolio tells a different story. The motor segment, which accounts for a significant portion of the company’s business, grew at a respectable 16% year-on-year, but this growth is expected to slow down in the second half of FY25 due to a slowdown in auto sales.
The P&C segment, meanwhile, posted weak growth of just 1%, and the group health segment is struggling due to poor pricing of risk.
These mixed results suggest that while ICICI Lombard’s overall business remains healthy, there are clear areas where growth is slowing or under pressure. This could make it difficult for the company to maintain its current growth trajectory without addressing these segmental challenges.
Higher Loss Ratios Reflect Rising Risks
One area of concern is the industry-wide rise in loss ratios. ICICI Lombard’s combined ratio (CoR) came in at 104.5%, up 55 basis points year-on-year, driven largely by natural catastrophe (NatCat) events, such as floods in Andhra Pradesh, Telangana, and Gujarat. Catastrophe losses surged 96% year-on-year, and while management has guided for a full-year CoR of 102.3%, excluding NatCat events, this rise in losses highlights the growing risk exposure the company faces.
The motor loss ratio, in particular, increased by 310 basis points to 87.6%, while the operating expense ratio also rose.
These figures reflect broader industry trends, but ICICI Lombard, suggests that even with strong underwriting discipline, managing profitability amid rising risks will require careful navigation. Management’s guidance of a 101.5% exit CoR for FY25 assumes no further NatCat events, but given the unpredictability of such incidents, this is far from certain.
Valuation: Strong Fundamentals but Limited Upside
From a fundamental perspective, ICICI Lombard remains one of the best franchises in the general insurance industry, with strong market share, particularly in retail health, and a clear focus on profitability over market share.
The company’s investments in health insurance distribution, its disciplined approach to underwriting, and its steady growth in gross direct premium income (GDPI) all suggest that it is well-positioned for long-term success.
However, at current levels, much of this optimism appears to be already priced in. The stock trades at a multiple that reflects the company’s growth potential, but without a significant catalyst—such as an unexpected acceleration in motor or P&C growth—it is difficult to see substantial upside from here.
While management’s focus on improving the CoR is encouraging, the challenges in key segments like motor and P&C, coupled with rising loss ratios, suggest that ICICI Lombard is likely to face continued pressure on margins.
Accumulate for Steady Returns, Not Explosive Growth
Given the current valuation and the company’s strong but not spectacular growth outlook, ICICI Lombard appears to be a solid “Accumulation” rather than a “Buy” for those seeking steady returns over the next few years.
We expect GDPI to grow at a compound annual growth rate (CAGR) of 14% and net profit at a 19% CAGR between FY24 and FY27, driven by improvements in the CoR. Return on equity (ROE) is projected to remain healthy in the 18-19% range, suggesting that ICICI Lombard will continue to deliver solid, if not explosive, returns to investors.
The stock’s current target price of INR 2,150 reflects these expectations, but without a clear catalyst to drive significant re-rating, it is unlikely to see a substantial revaluation in the near term. The positives—strong underwriting, leadership in retail health, and steady profit growth—are already priced in, and the headwinds in other segments could limit upside potential.
A Safe Bet, but Watch for Segmental Challenges
In conclusion, ICICI Lombard remains a well-run company with strong fundamentals, but investors should be mindful of the segmental challenges it faces. While the company’s retail health business is performing well, the motor and P&C segments are likely to face growth slowdowns and rising risks.
Given the valuation, the stock offers steady returns, but those looking for rapid growth or significant upside may be left waiting. For now, ICICI Lombard remains an “Accumulation” for long-term investors, with the expectation of steady but measured gains over the next few years.